Question

A major PC producer lowers the price of its desktop PC from $1,000 to $800. The sale of desktops increases by 25 percent. The sales manager notices that sales of the company’s laser printers increase by 15 percent. a. Calculate the arc price elasticity of desktop PC. Explain what it means. b. Why have the sales of laser printers increased? Calculate the arc cross price elasticity of laser printers. Based on your calculation, is a laser printer a substitute or complement? Why?

Answer 1

% change in price= (800-1000/1000)*100 = -20%

Ans.a-

arc price elasticity of desktop pc = % change in quantity demanded for desktop pc/ % change in price of pc = 25/-20 = -1.25

It means if price of pc decreases by 1% then its quantity demanded increases by 1.25%, keeping other things constant. Demand is elastic here.

Ans.b-

Sales of laser printers increased because people use PC and printers together i.e. they are complements. So, as price of pc decreases people start using more printers along with pc.

arc cross price elasticity of laser printers= % change in quantity demanded for laser printers/ % change in price of pc = 15/-20 = -0.75

Since Cross price elasticity is negative, so laser printer is a complement for pc.